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describe the imageWhen you are preparing your annual plan year end census file for your ESOP Third Party Administrator (TPA), there is a very good probability you need to provide hours of service for each employee.  Hours of service are generally used to perform the eligibility analysis to enter the plan, determine who has met the allocation requirements to share in the contributions for the plan year, and update an individual’s vested years of service.


Hours of Service Defined
DOL Reg. §2530.200b-2 defines an hour of service as:

  1. Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the applicable computation period

  2. Each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence

  3. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the employer

 

Salaried Employees
A common question that gets asked is how hours should be reported for salaried employees.  It is important to see if the employment contract specifies the hours worked for the position.  Another option is to use the hours recorded in the event the salaried employee is required to complete time sheets and submit them to the employer.


Equivalency Methods
In the event hours are not tracked for salaried employees AND the ESOP plan document provides for an equivalency option to be used, determining hours of service for salaried employees can be computed using the following methods:

  • 10 hours of service for each day

  • 45 hours of service for each week

  • 95 hours of service for each semi-monthly payroll period

  • 190 hours of service for each month

If an employee is credited with at least one hour of service during the unit of time method being used, they need to be given full credit for the period.  For example, if the monthly equivalency method is being used and an employee only works 1 hour in that month, they need to be given credit for 190 hours.


Another equivalency method can be based on earnings, as cited in DOL Reg. §2530.200b-3(f):

  • In the case of an employee whose compensation is determined on the basis of an hourly rate, a plan may determine the number of hours to be credited the employee in a computation period on the basis of earnings, if: (i) The employee is credited with the number of hours equal to the total of the employee's earnings from time to time during the computation period divided by the employee's hourly rate as in effect at such times during the computation period, or equal to the employee's total earnings for the performance of duties during the computation period divided by the employee's lowest hourly rate of compensation during the computation period, or by the lowest hourly rate of compensation payable to an employee in the same, or a similar job classification, reasonably defined; and (ii) 870 hours credited under paragraph (f)(1)(i) of this section are treated as equivalent to 1,000 hours of service, and 435 hours credited under paragraph (f)(1)(i) of this section are treated as equivalent to 500 hours of service.
  • In the case of an employee whose compensation is determined on a basis other than an hourly rate, a plan may determine the number of hours to be credited to the employee in a computation period on the basis of earnings if: (i) The employee is credited with the number of hours equal to the employee's total earnings for the performance of duties during the computation period divided by the employee's lowest hourly rate of compensation during the computation period, determined under paragraph (f)(3) of this section; and (ii) 750 hours credited under paragraph (f)(2)(i) of this section are treated as equivalent to 1,000 hours of service, and 375 hours credited under paragraph (f)(2)(i) of this section are treated as equivalent to 500 hours of service.

Summary
Using the correct hours of service in the ESOP administration is a responsibility of the Plan Sponsor.  Be sure to read your ESOP plan document to know how it defines an Hour of Service,  You might be surprised to find that your ESOP uses the elapsed time method for crediting service, which will be discussed in an upcoming blog post.

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